TMI Blog2021 (3) TMI 1230X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. Thus, the ground by the assessee is allowed, while the grounds of the revenue on this issue are dismissed. Head office expenses as required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction u/s 80-I / 80-IA - HELD THAT:- As all expenses, whether they are direct or indirect or fixed, semi-fixed or variable, must be adjusted to determine the profits derived from the industrial undertaking. Of course, any component of Head Office expenses, which has been incurred exclusively for the purposes of the business of any particular unit/ undertaking/division will have to be adjusted against the receipts of that particular unit/undertaking/division only. Similarly, Head Office expenses or expenses which are common to all the units/undertakings/divisions expenses will have to be spread over and charged against the receipts of all the units/ undertakings/divisions. If this course is not followed, then what would stand allowed u/s 80IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of sections 29 to 43. In this view of the matter and in the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As such, we confirm the order of CIT(Appeals) on this issue and dismiss this ground of appeal by the assessee. Disallowance u/s 14A - expenses incurred for earning the dividend from the investment made out of the interest bearing funds - HELD THAT:- As decided in own case it is clear that own funds of the assessee were much more than the investments that yielded tax-free dividend income. In such circumstances, we are of the view that the revenue authorities were not right in concluding that the borrowed funds on which interest was paid was used for the purpose of making investments that yielded tax-free dividend income. In that view of the matter, we are of the view that the addition made by the revenue authorities cannot be sustained. The same is directed to be deleted. Disallowance being provision made for loss order on the ground that same is contingent in nature and there is no scope for allowance of any liability that is unascertainable - HELD THAT:- AO says that the loss in question is contingent he is deemed to have questioned the basis on which the Assessee has quantified the loss. Without assigning a basis on which the loss is said to be accrued loss, the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific expenditure. It was held that Assessing Officer cannot sit in judgment over report submitted by prescribed authority . It was held that where Assessing Officer does not accept claim of assessee made under section 35(2AB), he should refer the matter to Board, which will then refer question to the prescribed authority. Expenses on the basis of purchase of packing materials, loose tools and consumables in the year of purchase - HELD THAT:- As decided in own case Assessee submitted before Assessing Officer that; (i) packing material shown as purchases as on 31-3-2005 was actually purchased in earlier months and such packing material was consumed during process; (ii) on account of some computer problem, bills were posted on 31-3-2005, and (iii) entire packing material left after end of year became obsolete and, therefore, it was not shown in closing stock. Assessing Officer rejected account books of assessee and made certain addition to his income. The Tribunal held that:- (i) it was not case of revenue that purchases as debited as on 31-3-2005 were not genuine, and (ii) assessee was following a consistent method of valuing closing stock by including packing material as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Explanation below section 80HHC of the Income-tax Act, 1961 [the Act] :- S.No Particulars Amount Rs. 1 Dividend Income 686,000 2 Interest 8,253,000 3 Interest on bank deposits 2,006,000 4 Interest on Others 3,039,000 5 Profit on sale of fixed assets 280,000 6 Miscellaneous income 111,723,000 Total 125,987,000 5. The CIT(A) observed that 90% net interest income i.e., after allowing set off of interest paid which has a nexus with interest received has to be reduced, and not 90% of the gross interest. With regard to dividend income of ₹ 6.86 lakhs, the CITJA observed that assessee has already reduced an amount of ₹ 6,86,190 from the profits gains, hence no further reduction is necessary. Regarding profit on sale of fixed assets, he obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 319860 3) Excise duty 4805403 4) Octroi 1231688 5) CS Fees 494500 6) Country Management fees 4535650 7) Service charges from Daewoo Power India Ltd. 1676081 8) Exchange Gain 58952904 8. Against these findings of the CITJA, both the assessee and the revenue are in appeal before us. 9. After hearing both the parties, we are of the opinion that this issue came up for consideration before this Tribunal in ITA No.3240/MUM/2004 for AY 2000-01 and the Tribunal vide order dated 18.3.2020 observed as under:- 10. As far as ground of appeal No.(i) of revenue is concerned, it is directed against the action of the CIT(Appeals) in treating other income as part of business income of the assessee not falling within the ambit of Explanation (baa) of section 80HHC of the Act, insofar as it relates to other income, except rental income, commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts, the ratio of the decision in the case of Kantilal Chotelal (Supra) is still applicable and hence these are required to be excluded by the operation of Clause(baa) of the Explanation. 6. If in the circumstance, the case of the appellant is examined in the light of three decisions viz., Bangalore Clothing Company (supra), K.K. Doshi Co. (supra) and Kantilal Chotelal (Supra) of the jurisdictional High Court, in so far as the application of clause (baa) of the Explanation is concerned, it has to be restricted in respect of the interest amount, profit on sale of assets, rent, notice pay, insurance claim, DBK on export, income from cancellation of order, sale of REP licence, commission amount received from Gujarat Prima and miscellaneous receipt. On the other hand, in the light of the decision of the jurisdictional High Court in the case of Bangalore Clothing Co. (Supra), in respect of receipts by way of scrap, sales, cash discount, excise duty recovered, exchange rate, sales-tax refund, it has to be held that the said clause has no application. These receipts are to be taken as part of the business profits as also as part of the total turnover. Further, the exchange gain i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Head Office that should be deducted as indirect expenses attributable to exports by way of trading carried out by the assessee. In doing so, the CIT(Appeals) followed the appellate order in assessee s own case dated 26.3.2003 for AY 1998-99. 13. The connected grievance projected by the assessee in this regard is the second part of ground No.2 in which the assessee has contended that trading exports are independent units and Head Office expenses need not be allocated to the trading exports unit. 14. As far as the grievance of the revenue in 2nd part of ground (i) is concerned, we are of the view that the said direction of the CIT(Appeals) is in accordance with the laws and we find no grounds to interfere with the order of CIT(Appeals). 15. As far as the grievance projected by the assessee in 2nd part of ground No.2 is concerned, we are of the view that the Head Office expenses has to be allocated to trading exports also. In this regard, we find that there is no material on record to come to the conclusion that trading export is an independent unit requiring no assistance from the Head Office. To this extent, the grievance projected by the assessee in 2nd part of ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts nexus with the business of assessee. 18. As far as commission is concerned, the plea of ld. counsel of the assessee is only for netting of the commission expenses against commission receipts and only excluding 90% of net commission. The plea made in this regard is accepted, subject to verification of the nexus between commission payment and commission receipt. The ld. counsel did not press for adjudication of exclusion of 90% of miscellaneous income of ₹ 1,41,71,000 under explan.(baa) to Sec.80HHC of the Act because of the absence of break-up of this item of income. 17. The facts and circumstances in the present assessment year being similar, we direct that the directions given in the order of Tribunal for AY 1999-2000 (supra) should be followed and deduction u/s. 80HHC be computed accordingly. 18. As far as miscellaneous income is concerned, it was admitted by the parties before us that the said issue was decided against the assessee in the order of Tribunal for AY 1999-2000 (supra). The grievance projected by the assessee in the first part of ground No.2 is decided accordingly against the assessee. 19. There are certain new items of other income which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration in assessee s own case in AY 1988-89 in ITA No.3809/MUM/2003, order dated 19.10.2012. In para 12.4, the Tribunal followed its decision in assessee s own case for the AY 1995-96. The issue was considered by the Mumbai Bench of the Tribunal in assessee s own case in AY 1997-98 in ITA No.2555/MUM/2003 by order dated 05.04.2007 and on identical issue it was held as follows:- The case of the assessee, however, is that the subject matter of deduction u/s. 80IA is the profits derived from the business of industrial undertakings and hence it is only that expenditure which is directly attributable to the earning of the said profits that can be the subject matter of deduction for computing the aforesaid profits and not head office expenses. We are unable to agree with the aforesaid submission for two reasons. First reason is that it is the profit derived by the assessee from the business of industrial undertaking which has been made eligible for deduction u/s. 80IA d not any other profit. Second reason is that the computation of profits eligible for deduction u/s. 80IA has to be done in accordance with the provisions of section 28 to 43. Perusal of the aforesaid provisions rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 5.4.2019 with the following observations:- 7. We have given a careful consideration to the rival submissions. We are of the view that the decision of the Tribunal in AY 1995-96 which was extracted in the earlier part of this order is applicable to the present assessment year also. We find no grounds to take a contrary view. The decision in the case of Zandu Pharmaceuticals Works Ltd. (supra) is with reference to apportionment of R D expenses and no parity of facts exist with the present case. As far as the decision of the Hon ble Madras High Court in the case of Hindustan Lever (supra) is concerned, that decision rests on the facts of that case, where it was found that common head office expenses were simple administrative expenses for running the business. In that view of the matter, we uphold the order of CIT(Appeals) and dismiss ground No.1 raised by the assessee. 4. In the light of the aforesaid decision of the Tribunal, we are of the view that there is no merit in ground No.1 raised by the assessee and accordingly the same is dismissed. 13. Following the Tribunal order for AY 2000-01 and taking a consistent view, this issue is decided against the assessee. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TECHNICAL SERVICE CHARGE Charges for Mechanical Design Drawing FAA-5*45M-2*24M-150M-A2 1 Lot. Total order value is USD 45,000.00. 60% amount on USD 45,000.00 is received. 27,000.00 Balance 40% amount now payable 18,000.00 Additional charges as per MOM dated 01.07.98 to 07.07.98 8,500.00 Total 26,500.00 INVOICE (dated 28.07.98) Consignee Asea Brown Boveri Ltd. (Taiwan), Air Pollution Control Group (PES), 6F, Nanhing E Road, Sec.4, P.O. Box 81 54, Taipei. Taiwan R.O.C. Description of Goods Quantity Rate USD Amount TECHNICAL SERVICE CHARGE Charges for Mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had provided certain engineering designs for the power plant(s) which Swiss company was, according to the assessee, to set up in India. However, no copies of engineering designs purported to have been provided to the foreign company were furnished for verification/examination even at this stage. As admitted by the learned AR before the first appellate authority, no agreement worth the name has been entered into with Swiss company to provide designs etc. It is rather surprising as to how the assessee - a Limited Company - had agreed to provide certain expertise such as engineering designs that too for setting up of power plant(s) without reducing the terms and conditions such as payment details etc., in writing. The learned A. R's argument that what has been claimed as deduction was on the basis of invoices raised for the purpose of receipt, in our considered view, doesn't have arty merit. Merely raising invoices for the purpose of having provided engineering designs cannot be a yardstick to determine the exact amounts received by the assessee for the services rendered by it. Mere raising of invoices and on the basis of which claiming deduction u/s 80-0 of the Act runnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,60,633/-. This figure was arrived at as under : Particulars year ending 31/3/2001 Year ending 31/3/2000 Stores Maintenance spares 6,956,209 9,258,309 Raw Materials 111,027,513 80,262,682 Components 694,422,309 553,494,266 Finished Goods 75,743,881 86,868,628 Contract in progress/WIP 499,790,463 363,371,801 Provision for Obsolescence (-)111179742 (-)111752538 1,276,760,633 981,503,148 21. The CIT(A) observed that the above figures are the aggregate of the figures relating to 7 units at Maneja Andheri, Nasik, Faridabad, Chennai, Kolkatta and Peenya. From the total value of stock the company has reduced provision for obsolescence at ₹ 11,11,79,742/-. The AO did not add back this amount and has added a different figure. After examining the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision for obsolete inventory as on Fresh Provision created/(Reversed) during the year 1/4/00 to 31/3/01 Closing provision as on 31/3/01 Andheri 8,375,143 1,285,226 9,660,369 Faridabad 4,806,000 300,000 5,106,000 Maneja 21,528,121 1,875,787 23,403,908 Nasik 8,479,225 -987,825 7,491,400 Chennai 1,613,000 - 1,613,000 Peenya 66,951,049 -3,045,984 63,905,065 Total 111,752,538 -572,796 111,179,742 24. On verification, the CIT(A) was of the view that the mistake happened in respect of Andheri and Faridabad unit. The closing balance in the provision account was shown as provision made during the year ignoring the opening balance. To sum up there is a reversal in the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in tax free dividends. 29. We have heard both the parties on this issue. Similar issue also came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999-2000 wherein the Tribunal held as under:- 40. From a perusal of the details of own funds available, it is clear that own funds of the assessee were much more than the investments that yielded tax-free dividend income. In such circumstances, we are of the view that the revenue authorities were not right in concluding that the borrowed funds on which interest was paid was used for the purpose of making investments that yielded tax-free dividend income. In that view of the matter, we are of the view that the addition made by the revenue authorities cannot be sustained. The same is directed to be deleted. 30. The facts in AY 1999-2000 being identical in the case before us, we delete the addition on similar reasoning. 31. The next ground (No.7) by the assessee reads as under:- 7. The Learned CIT (A) erred in confirming the disallowance of the sum of ₹ 20,264,477/- being provision made for loss order on the ground that same is contingent in nature and there is no scope for allowance of any lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 8,160,001 39. According to the AO, the loss in question was contingent in nature and cannot be allowed as deduction. According to the Assessee, as per the method of accounting followed by the Assessee, it provides for loss that are likely to be incurred on execution of particular order. 40. On appeal by the Assessee, the CIT(A) confirmed the order of the AO holding that the Accounting Standards claimed to have been followed in claiming the aforesaid deduction by the Assessee cannot override the provisions of the Act and that as per the Act only expenditure or loss that has accrued or ascertained can be allowed as deduction and not a loss that is likely to occur in future. 41. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. The learned counsel sought to place reliance on Accounting Standard-7 of the Institute of Chartered Accountants of India (ICAI) which provides in paragraph-21, 31 and 35 that when it is probable that total contract costs will exceed total contract revenue, the expected loss sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear in which the liability would actually accrue and the year in which it was claimed as deduction was one and the same. 42. The learned Standing Counsel for the Department submitted that there has been no basis given by the Assessee as to how it quantified the loss in question. He submitted that it is, at best, a provision which cannot be allowed as deduction and in this regard relied on the observations of the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT 314 ITR 62 (SC) wherein it was held that for a provision to be recognized as liability a reliable estimate has to be made of liability, otherwise it does not satisfy the test of being called as a provision for liability. 43. The learned counsel for the Assessee in his rejoinder submitted that the basis of quantification has not been disputed by the AO and that he has disallowed only on the basis that the loss is contingent in nature. He also submitted that the decision cited by the learned Standing Counsel for the Department is in the context of provision for warrant which is not applicable to the facts of the case of the Assessee in this appeal and in the context of claim for allowing antic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not available. The AO took note of the fact that the company did not explain the efforts made to recover the same. On being given a further opportunity the company reiterated its earlier stand. Copies of correspondence with various parties were filed. The AO held that the same are not acceptable as evidence. He further held that the company was unable to establish how it made an honest judgement regarding the amounts written off. The AO also concluded that the books of earlier years were not produced to show that the amounts in question had been part of the computation. The AO took a view that the decision to identify and write off bad debts should be a bonafide judgement. He therefore disallowed the entire claim. 37. During the appellate proceedings all details were filed/produced before the CIT(A), who sought a remand report from the AO on the submissions. In the first remand report dated 27.6.2005 submitted, the ACIT submitted that the company was requested to furnish the details relating to the bad debts and also individual details in respect of debts exceeding ₹ 2 lakhs. Examination of the details revealed that the claim of bad debts included advances written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : 43. The CIT(A) noticed that in respect of items exceeding ₹ 2 lakhs each write off is supported by documents and valid reasons. During the proceedings the learned representatives were asked to indicate the basis for identification of bad debt and the hierarchy involved in the decision making. It was clarified that each division has its own marketing and other functions. The marketing department of each division is responsible for recovery of dues. Since each division is treated as a profit centre, there is pressure on the marketing persons to realise all the dues. In this background, in case recovery has become difficult for any reason, the marketing group head of a particular division identifies such items and submits a proposal for write off. The proposal for write off was examined at 5 subsequent levels ending with the Managing Director and CEO as under : 44. It was therefore submitted that a decision for write off cannot be taken without documentation, valid reasons and application of mind. At every level the proposal is examined and vetted by a responsible group. It is further pointed out that no division would like to show a loss by writin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchasers. Each of these figures has been quantified by the AO himself after going through individual details. There is no question or doubt about the veracity. 47. The AO s objection that the company has not established that the amounts written off were not part of the book results in earlier periods, the CIT(A) held that this is a clear contradiction in terms. Having quantified the write off under various heads, the AO cannot say that these sums were not part of the book results. The objection of the AO was misplaced. The CIT(A) therefore held that the company has produced details to substantiate the claim by and large. The entire write off was a business decision based on facts and circumstances except in the following cases : i) In respect of smaller items a total claim of ₹ 53,23,047/- has been made. The full details of the claim are not available. ii) It is seen that the above amount further cannot be allowed as a deduction a) The following advances were made to group concerns : i) ₹ 7,01,844/- ii) ₹ 1,64,660/- The advances were written off on the ground that the companies which had received the advances had been sold. It is found that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied. This takes into account the business practice and the system employed for write off. In respect of older write off would not be in conformity with the system employed and the treatment of contractual liabilities. The details filed were therefore analysed. It was seen that 239 items amounting to a total of ₹ 6,28,40,382 represent debts which are less than 5 years old. 74 debts aggregating ₹ 2,18,33,372/- represent debts which are more than 5 years old as under :- Nature Number of Items Amount Late Delivery 63 18,563,076 Dispute of taxes 2 28,432 Frieght not paid/freight 1 6,097 Others 3 1,041,178 Technical disputes 3 483,034 Liquidity problem/company do not exist 2 1,711,555 Total 74 21,833,372 49. The Assessing Officer was directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to with approval in Vijaya Bank ( supra ). 53. However, from the close scrutiny of the orders passed by the lower authorities, we find that aforesaid aspect of the matter has not been examined. Therefore, the issue is remitted to the assessing officer to ascertain twin questions viz. , ( i ) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years, ( ii ) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet. The matter is remitted to the AO for de novo consideration of the aforementioned aspect. 54. In the result the assessee s appeal is partly allowed. 55. Coming to the revenue s appeal, ground No.3 reads as follows:- 3. The CIT(A) erred in directing the AO to allow deduction u/s 80HHB when no separate books in respect of foreign project were maintained. 56. The AO did not allow deduction u/s.80HHB in respect of specified projects. He held that the assessee has not maintained separate books in respect of business of foreign project. The CIT(A) noted that separate accounts were maintained in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be borne in mind that Section 80HHB of the Act is a provision, which grants incentive to the assessee for growth and development and as held by the Hon ble Supreme Court in several decisions, such provision should be liberally construed, as it will promote economic growth of the country. We therefore uphold the order of CIT(A) and find no merits in the relevant ground of appeal (iii) raised by the revenue. 58. Accordingly, we reject this ground by the revenue. 59. The next ground by the revenue is as under:- 4. The CIT(A) erred in allowing the claim of expenses towards entrance and the subscription fees paid by the assessee to clubs holding them to be revenue expenditure. 60. The AO has disallowed an amount of ₹ 9,05,227/-. This includes both entrance fees and subscription. This disallowance was deleted by the CIT(A) for AY 99-00 and 2000-01. Besides the ITAT, Bangalore Bench in East West Hotels Ltd. vs. ACIT 2006 9 SOT 48 has also held that entrance fees paid to club has to be allowed as business expenditure. Following the decision of the ITAT the disallowance was deleted by the CIT(Appeals). 61. This issue came up for consideration before this Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to our notice that identical issue was decided by the Hon ble Karnataka High Court in the case of Tejas Network Ltd. Vs. DCIT (2015) 60 taxmann.com 309 (Karn.) and it was held that where assessee claimed deduction under section 35(2AB) pursuant to certificate issued by prescribed authority, i.e., Department of Scientific Industrial Research (DSIR), approving such claim, Assessing Officer could not have denied weighted deduction under section 35(2AB) in respect of scientific expenditure. It was held that Assessing Officer cannot sit in judgment over report submitted by prescribed authority . It was held that where Assessing Officer does not accept claim of assessee made under section 35(2AB), he should refer the matter to Board, which will then refer question to the prescribed authority. In view of the aforesaid decision, we are of the view that there is no merit in ground No.(iv) raised by the revenue. 66. Accordingly, we reject this ground of appeal by the revenue. 67. Ground No.6 reads as follows:- 6. The CIT(A) erred in allowing the claim of expenses on the basis of purchase of packing materials, loose tools and consumables in the year of purchase without rega ..... X X X X Extracts X X X X X X X X Extracts X X X X
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